Entegris (ENTG) Q4 2019 Earnings Call Transcript

Entegris (ENTG -3.85%)
Q4 2019 Earnings Call
Feb 04, 2020, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to Entegris' fourth-quarter 2019 earnings release call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Bill Seymour, vice president of investors relations. Please go ahead, sir.

Bill Seymour -- Vice President of Investors Relations

Good morning, everyone. Earlier today, we announced the financial results for our fourth quarter of 2019. Before we begin, I would like to remind listeners that our comments today will include some forward-looking statements. These statements involve a number of risks and uncertainties, and actual results could differ materially from those projected in the forward-looking statements.

Additional information regarding these risks and uncertainties are contained in our most recent annual report and subsequent quarterly reports that we have filed with the SEC. Please refer to the information on the disclaimer slide in the presentation. On this call, we will also refer to non-GAAP financial measures as defined by the SEC and Regulation G. You will find a reconciliation table in today's press release, as well as on the Investor Relations page of our website at entegris.com.

On the call today are Bertrand Loy, our CEO; and Greg Graves, our CFO. Before I turn the call over to Bertrand, in case you didn't see it, we've recently sent out a save the date for our 2020 investor and analyst day, which will take place on May 11 in New York. We'll be sending out the event details and registration information in the near future. With that, I'll hand the call over to Bertrand.

Bertrand Loy -- Chief Executive Officer

Thank you, Bill. I will make some comments on our fourth-quarter and full-year performance and provide our view on how we see things going into 2020. Greg will follow with more details on our financial results and our guidance for the first quarter. We'll then open the line for questions.

I am really pleased with our strong performance in the fourth quarter, which resulted in record sales, EBITDA and EPS. The quarter played out largely as we expected. Sales grew 8% sequentially and 6% year on year. Our SCEM division grew 15% sequentially.

Growth was driven by specialty materials and by sales of deposition materials for advanced technology nodes, predominantly in logic applications. Our MC division sales grew 9% sequentially, also benefiting from sales into new nodes. The sales growth and effective expense control translated into improved profitability, and our gross margins, EBITDA margins and EPS were all up significantly in the quarter. Looking at the full-year 2019, we achieved record sales, up 3%.

Sales were down 3% on an organic basis in 2019, and we estimate the broader market was down 7%, which means we outperformed the market by 400 basis points on an organic basis for the year. The significant organic outperformance was driven in large part by continued traction of our leading-edge solutions in areas of increasing importance to our customers, including our strong position and wins in liquid filtration and advanced deposition materials. I am particularly pleased that despite a challenging industry environment, we maintained our R&D investments during 2019 while delivering strong profit results. Another highlight of 2019 was the organizational realignment we put in place in the summer.

This reorganization has been fully implemented now and will make us leaner, more agile and more responsive to our customers. And finally, as a demonstration of the value we provide our customers, we are very proud that in 2019 Entegris won the best supplier award at Samsung. Our performance in 2019, especially in the face of a very challenging end market, showcased the strength of our team's execution and our highly resilient, differentiated, unit-driven business model. As we are seeing now in the transition to new nodes, greater materials intensity and greater materials purity will be the primary defining factors of the next generation of semiconductor performance.

As you know, Entegris operates squarely at the crossroads of materials intensity and materials purity. In other words, we believe we have never been better positioned or more relevant to our customers to help them achieve the targeted levels of chip performance, yields and reliability. In fact, chip reliability has become a significant attribute in mainstream applications. Entegris brings a full suite of solutions to help our customers eliminate latent effects and positively impact the long-term reliability of their products.

The fast-growing automotive applications will give us an opportunity to expand our SAM and market share in a number of mainstream fabs. During the year, our capital allocation decisions led to additional value creation for our shareholders. During 2019, we allocated more than $630 million of capital, which included internal investments of $110 million of capex and investments in R&D of $120 million. We returned approximately $120 million to shareholders and invested $280 million in acquisitions.

Acquisitions, as you know, have historically been the largest area of capital allocation for us and have been a key component to our growth. In 2019 alone, acquisitions completed in the last two years contributed approximately $100 million to sales and $0.10 to non-GAAP EPS on an incremental basis versus our reported 2018 numbers. Acquisitions have also been a way to broaden our solution set, particularly in the targeted areas of materials and filtration. To that end, we did four tuck-in acquisitions in the last 12 months.

The first two were DSC and MPD, which serve different parts of the fast-growing advanced materials market. The third was Anow, the filtration company located in China. And in early January, we acquired Sinmat, which makes CMP slurries for silicon carbide and gallium nitride subspace, serving some of the fastest-growing end markets globally, including electric vehicles and 5G communications infrastructure. Sinmat brings us significant technical expertise and importantly, the addition of specialty CMP slurries to our broad portfolio of process solutions.

The acquisition we made in the past two years are perfect examples of the types of technology and applications we want to add to the Entegris platform: high-quality, value-creative, broader, unit-driven, differentiated businesses serving in high-growth markets. Going forward, we will continue to cultivate our pipeline of acquisition targets. Looking ahead to 2020, I would like to provide some perspective on the industry environment and how we see it impacting our business. At a high level, the market looks very healthy.

In logic and foundry, utilization rates are expected to be very solid throughout the year. And in the memory market, while not completely back to normal, we believe the trends are increasingly positive. In addition, we also expect to see continued positive impact of technology node transitions in both logic and memory in 2020, which will have a very positive impact on Entegris. Looking at our own business, we expect 2020 to be another record year.

We expect our sales growth in 2020 to range from 8% to 10%. I would like to just unpack the math of that 8% to 10% annual growth rate for you. To start, we expect the total market based on our mix of units and capex-driven sales to grow approximately 4%. On top of this, we are targeting to outperform the market by approximately 200 to 300 basis points, and this outperformance is expected to be driven by an increase in our SAM and our market share as we capitalize on greater materials intensity and purity requirements throughout the industry ecosystem.

In addition, we expect that the acquisitions we have already made will add approximately 200 to 300 basis points to our growth in 2020. So, if you sum it all up, this translates to our 8% to 10% growth guidance for 2020. In terms of EPS, we continue to expect to achieve the non-GAAP EPS exit run rate of greater than $2.50 in 2020, and this translates into full-year 2020 non-GAAP EPS in excess of $2.30. In conclusion, I am very pleased with the resilience of our unit-driven business model and our record results in 2019.

And I am very optimistic about our prospects in 2020. Before turning over to Greg, I want to thank our customers for the trust and confidence they place in Entegris. I also want to thank the Entegris teams around the world for their dedication and their relentless efforts. Entegris success is a direct result of the exceptional quality of the service they provide our customers every day.

I am very proud of what we have accomplished, and it's an honor and privilege to lead such a great team. I will now turn the call to Greg for the financial results. Greg?

Greg Graves -- Chief Financial Officer

Thank you, Bertrand. The fourth quarter was an excellent quarter for Entegris. Q4 sales of $427 million were in line with our guidance. Sales were up 6% year over year and up 8% sequentially.

Q4 GAAP diluted EPS was $0.42 per share, down 26% year over year and up 40% sequentially. On a non-GAAP basis, EPS of $0.55 was up 17% year over year and up 10% sequentially. Moving on to gross margins. Both GAAP and non-GAAP gross margins were 46.3% in Q4.

In line with our expectations, GAAP gross margin improved 300 basis points sequentially, and non-GAAP gross margin was up 170 basis points sequentially, primarily driven by higher volumes and improved mix. We expect gross margin to be approximately 46%, both on a GAAP and non-GAAP basis Q1. GAAP operating expenses were approximately $114 million in Q4 and included a total of approximately $20 million from amortization of intangible assets, integration costs, and deal costs. Non-GAAP operating expenses in Q4 were $93 million, slightly above the high end of our guidance.

We expect GAAP operating expenses will be $111 million to $113 million, and non-GAAP operating expenses to be $96 million to $98 million in the first quarter. Q4 GAAP operating income was $84 million or 19.7% of revenue, and non-GAAP operating income was a record at $105 million or 24.5% of revenue. Our GAAP tax rate was approximately 20% for the full year, and our non-GAAP tax rate was 18%. For 2020, we expect both our GAAP and non-GAAP tax rate to be 19% to 20%.

It's worth noting for modeling purposes, the first quarter typically has the lowest tax rate of the year. Adjusted EBITDA was also a record in the quarter at approximately $125 million or 29% of revenue, which was up approximately 200 basis points, both sequentially and year over year. Turning to our performance by division. Q4 sales of $147 million for SCEM were very strong.

The 10% year-over-year increase was primarily driven by advanced deposition materials as we continue to benefit from sales into the new nodes and from the positive impact of the DSC and MPD acquisition. On our third-quarter call, we said we expected a substantial rebound in SCEM's business in the fourth quarter, and SCEM grew 15% sequentially. This was driven primarily by a significant improvement in the specialty materials and specialty gas businesses, in addition to growth in advanced deposition materials. Adjusted operating margin for SCEM was 22.2%, and as expected, was up almost 400 basis points sequentially.

The increase in operating margin was driven primarily by higher volume and improved mix. Q4 sales of $170 million for MC were up 7% from last year and up 9% sequentially. The year-over-year and sequential sales increase in the quarter was driven primarily by strong growth in liquid filtration. In addition, we saw continued improvement in gas filtration in Q4, which is a capex-driven business was under pressure for much of 2019.

Sales in the fourth quarter were also positively impacted by the Anow acquisition, which closed in September. Adjusted operating margin for MC was 34.2%. The significant year-over-year and sequential margin improvement was driven primarily by improved mix. Q4 sales for AMH of $117 million were up 2% from last year and flat sequentially.

The year-over-year sales increase was primarily driven by sales of fluids and other wafer handling products. This increase more than offset a decline in fluid handling products. We continue to see improving trends in AMH, which is our most capex-driven division, was most impacted by the industry downturn last year. Adjusted operating margin for AMH was 17.3%, up modestly year over year, driven primarily by effective expense control.

We expect AMH operating margins to improve through 2020 on higher volumes and new product introduction. Cash flow from operations for the year was $382 million. Free cash flow was $270 million. As a reminder, 2019 cash flow included the Versum transaction termination fee, which after transaction costs and taxes contributed approximately $80 million.

As expected, cash flow improved significantly in Q4 from Q3, driven primarily by timing of receivable collections and lower inventory levels. Uses of cash during the quarter included capex of $26 million. For the full year, we invested $112 million in capex. We expect to spend approximately $120 million in capex in 2020 related to ongoing investments to support our new product introductions, as well as capacity expansion.

Consistent with our capital allocation strategy, during Q4, we used approximately $11 million for our quarterly dividend, and we repurchased over 300,000 shares for $15 million. For all of 2019, we repurchased 2.1 million shares at an average price of $0.35 per share. Turning to our outlook for Q1, we expect sales to range from $415 million to $430 million. We expect GAAP EPS to be $0.41 to $0.46 per share and non-GAAP EPS to be $0.50 to $0.55 per share.

In summary, 2019 was an excellent year for Entegris, especially in the context of a challenging market, and our performance really demonstrated the resilience of our model. Going into 2020, we see the industry environment is more constructive. And once again, we are well-positioned to outgrow the market, driven by increases in both SAM and our market share. All of this gives us confidence in our prospects for 2020.

Operator, we'll now take questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] We'll now take our first question from Patrick Ho of Stifel. Please go ahead.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Thank you very much, and congrats on a really nice year. Bertrand, first off, maybe for you. In terms of your outlook for 2020 and, I guess, some of the moving pieces there. In 2019, you talked about strength in advanced debt position, particularly in Q4, driven by some of the transitions we're seeing in both foundry, logic, and memory.

Can you give a little bit of color on the SCEM business and where you see not only opportunities in 2020 but maybe some of new products or, I guess, new areas where you can capitalize upon the growth in the industry in 2020?

Bertrand Loy -- Chief Executive Officer

Yes. Good morning, Patrick. Thank you for the question. So, we have, indeed, made a lot of progress over the last two, three years in our customer engagements in advanced foundries, in advanced memory.

Because of the value proposition that we have to offer that is centered, as you know, on new enabling materials, as well as contamination control solutions, we believe that we are really uniquely positioned to benefit from all of the future nodes not just in 2020 but for many years after that. So, that really means that I would expect significant outperformance for our deposition materials. I would expect significant outperformance for our new etching solutions. We have also very aggressive objectives for a number of new specialty coating solutions that we've been developing and introducing in the market in the last 18 months.

And, of course, we continue to have some very aggressive objectives for our liquid filtration platforms, both for bulk and for point-of-use applications in wet etch and clean and photoresist application. So, I think that instead of singling out any particular product platform in our portfolio, I think that what makes Entegris truly unique is the breadth of the solutions that we can offer to the industry road map and, frankly, the fact that we have many product lines that we expect will be outperforming the industry significantly.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Great. That's helpful. And maybe, Greg, as my follow-up question, you guys have been around for a long time. You've been able to manage the supply chain, both on the up cycles and the down cycles.

But given that you have had some small acquisitions recently, how do you, I guess, manage working capital? I guess working capital management in this environment, particularly as it starts to strengthen and build through the year, how do you integrate these acquisitions and make sure that you get the same churns that you've been able to do in the past?

Greg Graves -- Chief Financial Officer

OK. So really, I'll talk about two big components for us. First of all, accounts receivable, which, for us, at year-end, every year runs about 50 days. I mean, I think we've done a very good job there.

We continue to do a good job even with the companies that we've acquired. In some cases, for instance, SAES had a greater bias to Asian customers. The DSOs there tend to be a little bit longer, so you did see when we acquired them, our DSOs jumped by a couple of days. On the inventory side, I mean, this year, the inventory management is going to be a real balancing act.

I mean, we've got a major initiative around our MRP systems where we're focused on, on the one hand, reducing inventory, but at the same time, given our expectations that we expect to see improvement in the industry, combined with the uncertainty around the globe, particularly in China, I would say, we're going to be cautious. Our long-term goal is to reduce inventory. We're just not sure this is the year to be aggressive about it, given that we could potentially have some supply chain constraints through the year if we're too aggressive.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Great. Thank you very much.

Operator

Thank you. [Operator instructions] We'll now take our next question from Toshiya Hari of Goldman Sachs. Please go ahead.

Toshiya Hari -- Goldman Sachs -- Analyst

Hi, guys. Good morning, and congrats on a very strong year. Bertrand, you talked about your total market potentially growing 4% in 2020. And sorry if I missed this, but can you talk about how you're thinking about the capex side of the market as opposed to the wafer side of the market.

And then, within capex, if you can differentiate between WFE, what your equipment OEMs are likely to see versus kind of bricks-and-mortar on the infrastructure side, that would be helpful. Thank you.

Bertrand Loy -- Chief Executive Officer

Yes. No, thank you, Toshiya. So, let me start with MSI since it's still the primary driver for our business. And as you know, 70%, 7-0 percent, of our revenue is really driven by the fab activity.

So MSI assumption for 2020 is about 4%. And that's something that we believe is normal annual growth rate for MSI. When it comes to capex, so 30% of our revenue is tied to capex. But most of that, as you know, is really tied to new fab construction.

And that is about 20% of our total revenue tied to fab construction, which really means that our exposure to WFE is only approximately 10% of our total revenue. So, please keep that in mind when we have our annual assumption for capex for the total industry capex at about 5%, and we recognize that WFE will indeed grow likely faster than 5%. But at the same time, we do not expect new fab projects to be growing very much year over year.

Toshiya Hari -- Goldman Sachs -- Analyst

Got it. That was very helpful. And then as a quick follow-up, you also mentioned in your prepared remarks that acquisitions that you've made over the past couple of years have contributed toward $100 million in sales and roughly 10% in earnings. Obviously, without talking specifics on your pipeline, do you feel like you can replicate that or repeat that over the next two years? Do you think the M&A pipeline is robust enough to kind of deliver similar results over the next two to three years?

Bertrand Loy -- Chief Executive Officer

Yes. So, let me maybe just clarify what you said at the beginning. So, $100 million approximately of incremental revenue in 2019 versus the reported 2018 results, the accretion is $0.10, not 10%. $0.10 in 2019 as compared to the reported 2018 results.

But then to answer your broader question, yes, I mean, we believe that we are an effective acquirer, a very good integrator of the platforms that we have acquired. And we have demonstrated time and time again that we can create significant long-term value for both our customers and our shareholders. I would say that we have a healthy pipeline of potential acquisition targets. And that gives us reasonable hope that we can find more opportunities like DSC, MPD, Anow and Sinmat, which is a company we just recently acquired.

And that will give us an opportunity to expand our served market. So yes, I think the growth or the additional growth of two to three points I was pointing to relates to deals that we have already executed. And I would hope that we'll be able to find other small to midsize acquisitions to complete in 2020.

Toshiya Hari -- Goldman Sachs -- Analyst

Thank you so much.

Operator

Thank you. We'll now take our next question from Sidney Ho of Deutsche Bank. Please go ahead.

Sidney Ho -- Deutsche Bank -- Analyst

Well, thank you very much for taking my questions. My first question is on the 2020 guidance, the revenue guidance. I appreciate all the details behind that guidance of 8% to 10%. How do you think the progression of the year is going to look like for both the market itself and for Entegris? Will we see a spike in certain quarter, like what we saw in 2019? And kind of related to that, what are you assuming in the guidance, both for Q1 and for 2020, in terms of the impact of the coronavirus?

Bertrand Loy -- Chief Executive Officer

OK. So, let me start with the coronavirus question. I would say that obviously, the impact of the virus on the industry is nearly impossible to quantify precisely. But based on what we know today, we do not believe that the impact to our supply chain, to our operations or to our customers will be material on a full-year basis.

And we will obviously continue to monitor that very closely. But I will admit that we did relax a little bit the bottom end of our Q1 guidance just to take into account the potential risk of longer shutdown. So, that's something that we took into consideration for our Q1 guidance, but we decided not to try to quantify that risk on a full-year basis because we don't think it will have a material impact to the full-year performance of Entegris. Then going back to your first part of the question, we expect steady improvement in our performance every quarter.

And that's going to be a function of two things. The first part is that we expect a number of industry segments to strengthen over the years. And here, I'm thinking more specifically about DRAM and mainstream fabs, in particular. And then the back end of the year will also see a number of significant node transitions, both in advanced foundry but also in advanced memory.

And that's the reason why I would expect the second half of the year to be stronger than first half of the year for us.

Sidney Ho -- Deutsche Bank -- Analyst

No, that's great. Thanks. Maybe going back to Q4, if I kind of look at your revenue by geography, Taiwan was strong. That makes a lot of sense.

Korea, somewhat surprising to see it down quite a bit. And in terms of China, it's very strong. Within China, can you talk about maybe the dynamics between the multinationals and the domestic China? And any acquisitions make that comp look a little bit different? Thanks.

Bertrand Loy -- Chief Executive Officer

Yeah. So, you're correct, very strong performance in China. And China today for us is the 15% market, very important market. That's one of the reasons we continue to make significant investments.

We announced the opening of a tech center in Shanghai earlier in 2019. But the strong performance really was across all divisions. And in Q4, if anything, we posted record revenues for both microcontamination and AMH. And I'm pleased to say that a lot of that growth comes from new business opportunities with domestic Chinese semiconductor manufacturers, so very, very strong performance, obviously.

The reason why sequentially, the performance was so significant, really comes from a number of new fab projects that we benefited in Q4. And that obviously helps our fluid platform, helped our fleet handling, product lines and our gas purification systems. So, that's the reason why you can see that plus-27% sequential growth in China. But on a full-year basis, still remains actually very strong, plus 5% in China.

The story behind the sequential decline in Korea is, in fact, that we enjoyed -- in the first three quarters of the year, we enjoyed some very strong demand for our gas purification systems and fluid handling solutions, as a number of our Korean customers equipped several new mega fabs. But those projects came to an end in Q3, so that's really what's behind that contraction, sequential contraction in Q4. Having said that, I would point to the fact that SCEM, which is really more for unit-driven business in Korea, did perform really well. And that's a reflection of the success of the new molecules that we introduced and/or are even being evaluated for the higher layer count architectures in Korea for advanced memory.

Sidney Ho -- Deutsche Bank -- Analyst

That's great. If I can squeeze in one more. Regarding the acquisition of Sinmat, can you help us understand the size of that market and their growth potential, also maybe where the profitability of that business is today? Where is it going to go? And looking at a bigger picture, is that a business that you can leverage to the broader semiconductor wafer CMP market?

Bertrand Loy -- Chief Executive Officer

So, today, Sinmat is developing specialty slurries for ultra-hard materials like silicon carbide and gallium nitride. And that's really going to be our focus in the next few years. We believe that this particular market segment will grow very significantly. Today, that market is probably less than $50 million.

I would expect that market to double or more over the next four to five years, so a lot of growth ahead of us. So, when you think about our objectives when it comes to the integration of that platform, we really intend to run that platform fairly independent from the rest of Entegris. The reason we can do that is that we are fortunate enough that one of the founders, Dr. Singh, has chosen to stay on board.

And what we really want to do is really help him and his team be very successful not only in the U.S. but also in Asia. So, the goal is really to enable that growth by giving Sinmat access to our global distribution network but also by continuing to invest in their quality systems and manufacturing processes, to just continue to enhance their value proposition. So, we are very excited.

I think it's a great technology, great team, and we believe that that business will be growing at 20% plus annually for the next few years.

Sidney Ho -- Deutsche Bank -- Analyst

Thank you.

Operator

Thank you. We'll now take our next question from Paretosh Misra of Berenberg. Please go ahead.

Paretosh Misra -- Berenberg Bank -- Analyst

Good morning. Thank you. On the demand side, how are the node changes that you're seeing in 2020 different from 2019? Any contrast you can provide perhaps in terms of how big they are versus last year? And maybe also, what are the implications for you in terms of mix, etc.?

Bertrand Loy -- Chief Executive Officer

Yeah. So, the reason we are actually very excited with what we expect to see in memory is that, first of all, many more semiconductor manufacturers will be transitioning to more demanding nodes. And those nodes are, again, relying on more layer counts, which really makes the aspect ratio more challenging that will lead to the introduction of new etching solutions and the adoption of new deposition materials that can be deposited in thinner films and can actually bring better electrical property to the architecture. So, again, a number of new opportunities that we've been working on now for a number of years.

And when we believe that many of those opportunities for our SCEM division will come to fruition in 2020.

Paretosh Misra -- Berenberg Bank -- Analyst

Interesting. And then as a follow-up, on your cost structure, any major changes that you're seeing? Any costs that are going up this year versus last year that we should be aware of?

Greg Graves -- Chief Financial Officer

No, not in particular. I mean, I think we delivered strong gross margins in Q4. Our model for 2020 assumes that there's a margin progression through the year and margins, gross margins continue to improve. Our opex, which we said will be up a few million dollars in Q1, we'd expect that to be sort of the new paradigm, potentially creep up a little bit more as we move into Q2 and Q3.

But that's all consistent with the guidance that Bertrand said of an EPS above $2.30, and which also happens to be consistent with our target model.

Paretosh Misra -- Berenberg Bank -- Analyst

Got it. Thanks, guys.

Operator

Thank you. We'll now take our next question from Chris Kapsch of Loop Capital. Please go ahead.

Chris Kapsch -- Loop Capital -- Analyst

Good morning. Hey, appreciate the comments on the enthusiastic prospects associated with the memory market coming back. I'm just curious. there's a couple of things that could benefit your demand profile.

One is just the, I guess, the utilization rate improving, and two, as you point out, the transition to the advanced nodes. Just curious, which one are you more excited about as you look to 2020? And also, if there's any way you could frame up the content per die or per wafer as the memory market transitions to some of those advanced nodes with the more complex and more layers associated with the architecture.

Bertrand Loy -- Chief Executive Officer

Yes. The quantification for wafer is always tricky to do. We do that at customer level, but that's not something we can comment on publicly. But I would tell you that this is actually pretty significant for some of our customers.

And that's why I would answer the first part of the question by saying that what I'm most excited about really are the node transitions simply because we know that more wafers, ultimately, will be produced at those new architectures so that, over time, the wins that we have scored on some of those architectures will compound themselves and help us sustain that excess growth rates for a number of years.

Chris Kapsch -- Loop Capital -- Analyst

OK. Fair enough. And then in the fourth quarter, it was, in fact, node transitions, I think, that helped contribute to the strong quarter. But the margin level was pretty impressive, both sequential and year over year.

Curious, is that a function of node transitions? And since you called out in 2020, the expectation that the second half, you'd have more benefit from advanced node transitions in both logic, foundry, as well as memory. How do you see those transitions influencing your margins as we progress sequentially through 2020?

Greg Graves -- Chief Financial Officer

Yeah. So, first of all, in Q4, I mean, the improvement in the gross margin was really twofold. First of all, I mean, we obviously had quite a bit better volume. In particular, we had better volume in areas where we had previously talked about having capacity that was being underutilized within our SCEM business.

And then, frankly, we had better product mix. And so those were the two big contributors to the margin improvement in Q4. As we work through the year, I mean, a combination of, as you pointed out, some of the products with regard to new nodes within deposition, etch, liquid filtration, will obviously have good margin structures. But also, we expect the volumes to improve throughout the year as well.

Chris Kapsch -- Loop Capital -- Analyst

OK. Thanks for the color.

Operator

Thank you. We'll now take our next question from David Silver of CL King. Please go ahead.

David Silver -- CL King -- Analyst

OK. Thank you. So, a couple of questions for Bertrand, and then I had a question for Greg. So, this first question has been answered, I think, in part, but I was just trying to integrate some thoughts.

But when I look at your fourth-quarter results, and there was a nice sequential pickup in SCEM, nice sequential pickup in microcontamination but kind of flattish results in the more capital-intensive AMH unit. Painting with a fairly broad brush here, but would I be correct to say that the fourth quarter reflects the ramp-up of production of kind of the leading-edge nodes at your customers, let's say, as opposed to the start-up of new fabs or price increases or something like that? So, in other words, Intel and Taiwan Semi had talked about rising utilization for their newest chips. Is that a fair reflection of what we're seeing in your results and maybe for the near term that they might track the utilization at some of your major customers? Thank you.

Greg Graves -- Chief Financial Officer

Yes. David, so I think you're correct. I mean, if you think about AMH, the reason why it was sequentially flat is really, as I mentioned in a different context earlier on the call, we saw fewer new fab projects in the quarter, and that had a dampening effect on our fluid handling business. And that's one of the primary reasons why AMH is flat sequentially.

When it comes to SCEM and microcontamination, both had exceptional Q4s, both had record quarters in Q4. SCEM, up 15%; microcontamination, up 9%. And that's really a function of more wafers being produced at those more advanced nodes, both in logic, foundry but also in memory. And frankly, I think that's the momentum that we expect to continue in 2020 and into future years.

David Silver -- CL King -- Analyst

OK. Thank you for that. I did want to ask the question, I guess, about EUV. So, maybe compared to a year or two ago, when EUV was anticipated but not quite ready, I think it's kind of been firmly established at the leading-edge fabs now, pretty much throughout the industry.

Could you maybe just talk about your strategy? Well, first of all, how you think the early signs of the puts and the takes or the positives versus potential changes required or transitions in your business? Like, how are you positioned to take advantage of that? And what's your forecast for the growth in your EUV-related products and services? Thanks.

Bertrand Loy -- Chief Executive Officer

So, broadly stated, I would say the EUV is one for technology for the semiconductor industry. I mean it will allow us, as an industry, to continue to have really bold dreams about shrink and about complex architectures. And that's why it's going to be enabling five-nanometer this year, and we will, in short order, I'm sure go to three and beyond. And that's wonderful because those new architectures will be requiring new materials, but more precise etching chemistries.

And more importantly, would be increasingly vulnerable to contaminations. And if you think about the value proposition of Entegris, we will be ideally positioned to develop the solutions required for the industry to continue to advance on the road map. And we have mentioned a few specific products like EUV parts and others. So, we have some direct opportunities around mask management or even around the scanner.

But really, what we are most excited about are the indirect opportunities up and down the supply chain. And what I mean by that is that the purity requirements will become much more stringent for a broad array of chemistries and materials. And those requirements will drive the need and the usage for more advanced filtration, pure packaging solutions across the ecosystem. So, as a leader in contamination control, as a leader in ultra-pure packaging solutions, I think we are ideally positioned to capitalize on all of those new opportunities that will come with the adoption of EUV.

David Silver -- CL King -- Analyst

OK. That's great. And then for Greg, I had more of a structural question, I guess. And maybe the timing is related to kind of the current favorable structure of long-term interest rates, but when I look at your cash flow statement for 2019, it was a record year across a number of cash-generating measures, but it was also a year where you kind of outspent the cash flow you generated internally.

Bertrand has talked about being a consolidator of the industry. There was the Sinmat deal in January. Is now a time to kind of look at maybe a broader -- maybe make a move to add financial flexibility or capability as you continue to execute on your strategy that, in my opinion, you might outspend your internal cash generation for the next year or two as you did in 2019 out there? Thanks a lot.

Greg Graves -- Chief Financial Officer

So, we are constantly looking at our options. I mean, I think what we're committed to is maintaining that strong BB rating, which implies a leverage level of somewhere max leverage level on an ongoing basis, somewhere around 2.5 times. But what I would say as well is, like I said, we're constantly looking at our options. The debt market is extremely strong right now.

I'm not saying we'll do anything in particular, but like I said, we're constantly assessing our options.

David Silver -- CL King -- Analyst

OK. Thanks very much.

Operator

Thank you. We'll now take our next question from Amanda Scarnati from Citi. Please go ahead.

Amanda Scarnati -- Citi -- Analyst

Thanks for taking my question. Last year, you mentioned a couple of specific product lines that had quantifiable revenue that gave you confidence in your growth. Is there anything on the horizon in 2020 that you can sort of quantify or that we can look to throughout the year to see if these metrics are being met in terms of new product introductions or existing order flow at customers?

Bertrand Loy -- Chief Executive Officer

Yeah. Amanda, it's true that several years ago, we chose to give a little bit more color around certain product lines. But we quickly realized that we don't really have any product line that would amount to more than $30 million to $40 million a year. So, given the fact that we have new product lines that are really very, very material to our top-line performance in the recent past, we have elected not to single out any product platform.

That's something that we may choose to do differently, and that's certainly a question we are asking ourselves as we stop thinking about how to structure our analyst day in May. So, stay tuned. We may have a little bit more details around certain product lines during the analyst day. But again, that's not something that we intend to do today.

Amanda Scarnati -- Citi -- Analyst

And then just in terms of sort of the acquisition pipeline, you mentioned a healthy pipeline of activity. Are you looking more toward smaller acquisitions that would sort of fill up the product portfolio, maybe piecing together different opportunities lost with Versum, or are you looking for something that could be just major and transformative? And if that were to be the case, what would be sort of the net leverage that you would be comfortable going to for a larger deal?

Bertrand Loy -- Chief Executive Officer

Right. So, we have a business development team of two to three persons, and they are really focused on small to mid-sized transactions. I mean those are the transactions that are actually the most actionable and this is also a pipeline that we've been nurturing now for many, many years. So that remains the primary focus of that team.

Greg Graves -- Chief Financial Officer

And that, Amanda, as it relates to leverage, I think we've been pretty consistent that we'd be willing for a transformational transaction to push leverage into the 3.75 area, up from kind of the current number of around 2.5. And we're comfortable that we can maintain our current rating structure, if it's a temporary increase, which is how we would view it.

Amanda Scarnati -- Citi -- Analyst

Thank you.

Operator

Thank you. We'll now take our last question from Krish Sankar of Cowen and Company. Please go ahead.

Krish Sankar -- Cowen and Company -- Analyst

Yeah. Hi. Thanks for taking my question. Bertrand, thanks for the color on China, and you guys had pretty good growth of 5% there last year.

Just a question on that. Is this mainly coming from the capex side of your business, or are you seeing strong unit-driven sales? Or possibly, how will the unit-driven sales evolve this year from China given that at least one of the domestic memory customer has an aggressive ramp plan?

Bertrand Loy -- Chief Executive Officer

Yeah. No, thank you for asking that clarifying question. Obviously, I was not clear enough in my first answer. But what I was really describing was the sequential growth, Q3 over -- Q4 over Q3, sorry.

And if we look at our growth overall, for the past four years in China, we have a compounded annual growth rate of 22%. And that is mostly unit-driven. So again, great performance across all divisions and across all product platforms, and in particular, really great performance in microcontamination, which is mostly filtration and unit-driven products, as well as in a number of new chemistries and materials in SCEM.

Krish Sankar -- Cowen and Company -- Analyst

Got it. That's very helpful. And then a final question is, who are the biggest competitors for Sinmat today?

Bertrand Loy -- Chief Executive Officer

So, Sinmat has a number of competitors. There would be some of the traditional suppliers with abrasive materials.

Krish Sankar -- Cowen and Company -- Analyst

Thank you very much.

Operator

[Operator signoff]

Duration: 60 minutes

Call participants:

Bill Seymour -- Vice President of Investors Relations

Bertrand Loy -- Chief Executive Officer

Greg Graves -- Chief Financial Officer

Patrick Ho -- Stifel Financial Corp. -- Analyst

Toshiya Hari -- Goldman Sachs -- Analyst

Sidney Ho -- Deutsche Bank -- Analyst

Paretosh Misra -- Berenberg Bank -- Analyst

Chris Kapsch -- Loop Capital -- Analyst

David Silver -- CL King -- Analyst

Amanda Scarnati -- Citi -- Analyst

Krish Sankar -- Cowen and Company -- Analyst

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